Microsoft's Phil Spencer on Xbox growth, recent job cuts and the future of games on discs
Plus: A brief chat with legendary Nintendo composer Koji Kondo
Microsoft’s gaming chief Phil Spencer is upbeat about his vast Xbox team’s future. But he also tells Game File he is concerned about stagnation in the business and wary of trying to squeeze too much money out of existing players.
“It sounds cheesy, but I've never been more bullish about where we are,” Spencer told me during an interview last week.
He was talking about Xbox’s gaming business, ahead of an announcement that the company will bring four of its exclusive games to rival consoles and ahead of a tease about its next-gen console.
“We're growing on PC. We're growing on cloud. Our game studios is just an amazing creative organization. We've got great support from the company,” he said."
“We do need to be part of this industry growing. I think that's got to be a real focus.”
Tough times
Spencer’s sunny summation comes amid some dark clouds. In January, Microsoft laid off around 1,900 workers from a gaming group that includes the recently acquired teams at Activision Blizzard King. And it comes while Spencer himself is sounding the alarm about an industry slowdown.
The global video game business is big but barely growing, Spencer noted to me. One measure, from industry research firm Newzoo, estimates that 2023 game industry revenues were up just 0.6% from 2022.
“I don't think we're doing a good enough job finding new players,” Spencer said. “Let's pick consoles as a good example: We found 200 million global households that will play console games. And that number really hasn't changed in the last five, six years.”
“We've raised the price of games,” he added, acknowledging the increasingly common $70 price point following nearly two decades of $60 games. “We went through COVID. We found ways of getting more money per player. I think at some point you reach a peak on that, and, frankly, it can go to some places that are manipulative that I'm not a big fan of.”
The solution, he said, is to “find new customers, and you find new customers through new ways of delivering games to players who can't play those games today, whether that's device, whether that's access, whether that's price point of video games.”
An uptick in cloud gaming
Microsoft (like Nintendo long before it) has been trying to shake up the industry as it searches for new players. In recent years, it has tried to find them by streaming Xbox games over the cloud to phones, smart TVs and tablets, de-emphasizing the console as a must-own device to enjoy console games.
Microsoft also entered the current console generation with two models of its Xbox Series hardware, a fully-featured $500 Series X model and the stripped-down $300 Series S for more budget-conscious shoppers.
Cloud adoption and expansion had been slow, but is finally picking up, Spencer said. Gaming via the cloud now accounts for a double-digit percentage of total hours of Xbox games played, he noted. “There was a time when we weren't deploying more [server] blades because we had more supply than we did demand for the server racks that we had in place,” he said. “That's clearly not true today.”
Last June, Xbox executives testified during a hearing regarding the Microsoft-Activision deal that Xbox cloud gaming had mostly been used by console gamers to try games without downloading them (meaning it wasn’t significantly expanding the market). “Any conversation we have on cloud is very time-dependent because it's growing so fast,” Spencer said.
Xbox cloud gaming growth in the last six months, he said, has been “in markets that are never going to be console markets,” and has been spreading across TVs, Chromebooks and Android tablets.
As for the Series S, Spencer told me in 2020 that he expected it to outsell the more expensive Series X lifetime. He told me last week that he still expects that to be the case.
The cuts
Spencer frames last month’s 1,900 jobs cuts from Microsoft’s gaming teams as a result of a need to keep the company’s Xbox division growing.
“I have a commitment to the company on the Xbox business being a profitable and growing part of Microsoft,” he said. “And I need to put us in the best position for long-term growth. Most of that is about building great products that exceed their expectations and find millions of customers. But honestly, you know, the cost of building the products inclusive of the people who work on them—I need to make sure we have enough of the right people and the right number of people in the right places for us to succeed.”
Microsoft’s gaming business is not shrinking, though its success hasn’t come cheap. The division’s revenue grew 61% in the last three months of 2023, but largely due to the addition of Activision Blizzard, which cost the company more than $69 billion to acquire. Without it, gaming revenue grew 6%—a better rate than the industry overall—but lower growth than other divisions at Microsoft.
Game companies are cutting industry-wide, and cuts following a big acquisition are a given, but the scale of Microsoft’s job eliminations from its gaming teams did catch media, analysts and workers themselves by surprise. They included at least one full game project shutdown at Blizzard.
Why cut so deep? “I'd say it was a combination of us looking across the full portfolio of what was working, which we have to do, and running the business, as well as areas of alignment between Activision, ZeniMax and Xbox,” Spencer said. He also noted that, since the acquisition of the ZeniMax family of studios three years ago, the organization added “about 15,000 people” to its business.
Note: For Spencer’s comments on Xbox’s growing Game Pass subscriber base and the state of gaming exclusives, check out last week’s newsletter. And there’s more below…
Item 2: Ditching discs is not a must for Xbox fans
Phil Spencer and other Xbox executives emphasized certain core promises to gamers, during their business update podcast last week: the ability of players to buy a game once and own it across Xbox and PC, to have new Xbox consoles still play the games they bought for older Xbox consoles, for save files to transfer across versions and generations, etc.
A topic Microsoft skipped, though, was physical media: discs.
I asked Spencer if Xbox would commit to supporting games on discs. It wasn’t a random query.
Microsoft, like Sony, already offers one variation of its current-gen console that doesn’t have a disc drive and requires games to be downloaded.
But in September Microsoft accidentally leaked a plan for an “all digital,” no disc drive version of its higher-end Xbox Series X console, sparking speculation that it is ready to move on from supporting disc-based games.
Spencer later tweeted that the full sweep of leaked plans, which included that new model, had changed in some unspecified ways.
Spencer wouldn’t talk to me last week about that leaked all-digital Series X, but said Microsoft will “follow what the customers are doing.”
“We are supportive of physical media, but we don't have a need to drive that disproportionate to customer demand,” he told me.
“We ship games physically and digitally, and we're really just following what the customers are doing. And I think our job in running Xbox is to deliver on the things that a majority of the customers want. And right now, a majority of our customers are buying games digitally.”
When I pressed if Microsoft would release a console without a disc drive, he pointed out the company had already done that with the Series S. (I walked into that one, folks. Sorry!)
He also hinted at some economic concerns. “Gaming consoles themselves have kind of become the last consumer electronic device that has a drive,” he said. “And this is a real issue, just in terms of the number of manufacturers that are actually building drives and the cost associated with those. And when you think about cogs that we're going to go put in a console—and as you have fewer suppliers and fewer buyers—the cost of the drive does have an impact.
“But I will say our strategy does not hinge on people moving all-digital,” he said. “And getting rid of physical, that's not a strategic thing for us.”
As for the reporting that Microsoft had laid off people on teams involved in making disc versions of games, Spencer said that was more about “alignment of our teams across ZeniMax, Activision and Xbox. So we have teams that are in charge of physical retail, inclusive of selling games in physical outlets. So that's what the team action was. It wasn't about us getting rid of the capability.”
Item 3: Call of Duty Game Pass update
Microsoft has yet to say when Call of Duty will be added to its Game Pass subscription service, but the flagship Activision Blizzard franchise is still coming, Phil Spencer tells me.
“Our intent is the full portfolio of games from ZeniMax, Activision Blizzard and XGS—Xbox Game Studios—will be on Game Pass, day one,” he said. (Day one = when they also go on sale.)
Exactly what that means for CoD is a little fuzzy. Existing Call of Duty games aren’t on Game Pass yet. This year’s CoD hasn’t even been announced. And Microsoft has advised fans that there will be a lag on making this all happen.
Last week, Microsoft said Blizzard’s Diablo IV, launched in June before the Microsoft purchase, will come to Game Pass on March 28.
Spencer said there is development work to be done to get Game Pass launches going for the Activision Blizzard games. “We're doing the back end work to make them come to PC and console simultaneously,” he said.
Item 4: OpenAI comes for gameplay videos
ChatGPT maker OpenAI says that Sora, its new text-to-video AI, was able to create what look like Minecraft gameplay videos based on “captions mentioning ‘Minecraft,’” according to an in-house article on the tech published by the company.
Clips of Sora’s creations went viral last week, though most of what circulated focused on examples in which a few sentences of descriptive text supposedly prompted the AI to create what appeared to be live-action video shorts.
The company also showed two clips of what looked like Minecraft being played from its standard first-person perspective. OpenAI didn’t capture gameplay footage from the game but apparently conjured it into a video. The company said this was an example of Sora “simulating digital worlds” by rendering a game world and then controlling a “player” as it moves through it.
There are many unanswered questions about what tech like this can do and what it’’s pulling from.
Minecraft is owned by Microsoft, which is a major investor in OpenAI. The Xbox/Windows tech giant is all-in on AI, including AI’s intersection with gaming.
Item 5: In brief…
🕺 A choreographer’s lawsuit against Fortnite maker Epic Games over alleged copyright infringement of dance moves has been dismissed for a final time, Reuters reports.
👀 Two esports players are suing Activision Blizzard for $680 million, alleging the game company has maintained an illegal monopoly over Call of Duty esports, Bloomberg reports. A rep for the publisher said the suit was “meritless” and “disruptive” to those working to make its Call of Duty League successful.
🇫🇷 Nearly 700 Ubisoft employees in France went on strike for a day last week to call for higher wages, Eurogamer reports.
😲 Nintendo’s unannounced successor to the Switch has been delayed to early 2025, at least, per VGC and Bloomberg (sending Nintendo’s stock down 6%).
🎮 Alan Wake 2 has sold 1.3 million copies since its October launch, development studio Remedy announced late last week, calling it the company’s fastest-selling game—and predicting a long tail of sales based on glowing critical response. Earlier this month, Remedy said it expected to post an overall loss for 2023, partially due to the write-down of a canceled game.
🔥 Helldivers 2 continues to be a surprise smash hit on PC and PlayStation, cracking 400,000 peak concurrent players on Steam (currently bigger than 2024’s other surprise stunner, Palworld).
Players who couldn’t log in to the game’s overloaded servers were offered enhanced progression as a make-good, but that seems to have only increased demand to play. “Maybe not the best idea,” the game’s creative director, Johan Pilestedt, quipped yesterday.
🏆 Baldur’s Gate III won Game of the Year at the Academy of Interactive Arts & Sciences 27th annual awards, held during the DICE Summit in Las Vegas. Full winner list.
Item 6: Some advice from Koji Kondo
Nintendo’s Koji Kondo has been making music for games for 40 years, including theme songs for Super Mario Bros., Super Mario 64 and multiple games in The Legend of Zelda franchise. At the DICE Summit last week, he became the first composer inducted into the Academy of Arts & Sciences Hall of Fame.
After he won his award, I asked him: What’s your advice for young video game composers?
“That's a really tough question,” he replied, through a translator. “I don't think that I'm in any position to be able to be giving advice to younger composers.
“That being said, I think it would be to have fun, of course. Listen to all kinds of different types of music and then play that music. I think that's really important: Listen to different types of music. Play that music."
I wondered why my Nintendo stocks had fallen but hadn't had time to investigate! Thanks for that info.